Risk Management: Lessons From Ground Zero

by Cesar Bacani, 12 March 2012

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topics:
Risk Management

tags:
leadership risk management talent management

It’s a very complicated world right now, both in the complexity and products, the inter-connectivity of international markets and the fact that you’ve also got geographic complexity. You have companies that are operating across multiple regulatory environments, with different levels of skill sets and organization.

We were very reliant through the financial crisis on these models as having the right answers. And while the models are a useful tool, they have to be judged alongside gut instinct and reading the market and trying to anticipate what we missed in the model. And that comes from leadership.

When you say leadership, it’s not just the CEO?

Exactly. We were presenting Goldman Sachs as best practice in risk management [at a recent Richard Ivey seminar for global insurer Manulife]. In Goldman, it’s all the way down, it’s bottom up and top down.

In certain trading positions, they have to have unanimous agreement at the committee. You have a lot of opportunity to discuss and debate and present dissenting views, but at the end of the day, you have to reach a consensus.

You need everyone to agree. It’s not majority rule, it’s 100%. This means you have to come in very well prepared to have meaningful discussions and you’ve also got to be prepared making decisions or holding back. So it’s a huge responsibility.

In the old days, when things were less complex, you didn’t need the same degree of education and intellect in the senior roles. Now it’s a different world. You need people that can understand the global environment of business and what’s happening with trends.

You need people with experience to see down-cycles, up-cycles, to be able to have that intuition or that nervousness in the gut to be able to say, you know, this sounds good now, but if I think about what we went through in the 2008 crisis, could this be another thing?

You’d think that nothing in Goldman can be done if consensus is the criterion.

They can amend the course of action proposed [to accommodate the views of the dissenters] or they can get another scenario run [that everyone can then agree on]. They run their models every day.

The CEO gets a consolidated P&L for the entire company every day, with everything marked-to-market to that date. So it’s a very robust business model.

And that is made possible by technology?

By technology and their commitment to that level of investment [in technology] . . . They rank up there with technology companies in terms of the number of servers and the percentage of budget that’s spent on technology just to maintain the models.

Not everyone is a Goldman Sachs; not everyone is in financial services. If you run a hotel, retail chain, commerce and industry, this level of sophistication is probably overkill.

Probably, but it’s really about how you understand the horizon under which things could be changing for your business, and that you’ve got appropriate information coming in to help you understand and monitor what’s going on.

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